What is the main reason and factor that makes tribes and groups of people from the same developing nation fight each other, and divide themselves into other tribes living in hostility?
This is the journey of the devil’s circle which began in ancient times. The journey, which we are doomed to live with forever and ever, takes root from a bad combination, or mixture, that occurred in that country sometime earlier. This is the combination of weak governance and big potential income.
The crisis that hit hospitals for children of all ages, in Ulaanbaatar City last week has exposed and proven again how really the Mongolian governance is weak. Maternity houses no longer can meet minimum requirements and conditions of public hospitals, and have needed to rent facilities, leading to three children sleeping in a single bed in that rented facility.
Principal governance duty and responsibility of a democratic state is to protect life, health, property and the freedom of its people. This duty and responsibility means the establishment of every single standard and norm of necessary conditions and ensuring the observation of these standards and norms in a proper and strict manner. Once a law or order is established, it must serve every single person in an equal way, but sometimes it is called the government showing its power and strength.
Unfortunately, our government fails to fulfill its principal duties and heretofore had not solved many problems existing for many years. Consequently, certain social branches are in crisis and ordinary people lose lives.
The early wave and signs of such a crisis also is happening in the education system, which is demonstrated by the fact that citizens seek to run away and escape abroad from their homeland in search of a quality education, en masse. They also seek the possibility to stay there in that foreign land, and search for a better paying job. A man never dies due to a crisis in education, but he seeks to escape from it.
However, the crisis in the health care system is more urgent, as it can potentially cause the loss of lives of many people, most importantly, infants and children. Maternity houses and children’s hospitals have lost management and it has been many years that there has been no planning or policy-making, or fulfillment in these areas. In addition, there is no hierarchical control or supervision over them, and no structure in place to impose responsibility and accountability at all levels. All these negligences have turned maternity and children’s hospitals into places where people are not healed but are infected and their lives needlessly stolen away.
Ideally, these are supposed to be the places to which people go for healing, not for dying. Ministers and officials who are appointed by political parties and who are responsible for all of these, do not do their jobs and always change directions before doing something for the good of people. The only thing they’ve managed to do is to create an abnormal system in which they, when sick, go abroad for treatment at the expense of the taxpayers, while leaving the general citizenry to deal with the problematically afflicted hospitals here. All this proves again just how deep the crisis in the health care system is.
The next wave of the crisis is ready to hit the system of dwelling apartments and public utilities. All hot and cold water piping systems of dwelling blocks in the capital city are totally deteriorated and are ready to erupt and cause seriouse damage to thousands of dwellers. Water and sewage pipes that must be replaced after twenty years utilization, are deliberately “forgotten” to be changed in a planned way by city authorities, and so-called apartment owners’ associations, which were privatized by the city authorities, in conspiracy.
A bad governance waits until the crisis develops and the people die, instead of planning their work and preventing the crisis. The only thing they care about is getting additional money or budget revenue for themselves while they’re in office. In addition to the current system of weak governance and unaccountability at all central and local administrative levels, it is also the time to make huge profits from mineral resources.
Authorities from a country with weak governance spend income from mineral resources for their own personal wealth, while ordinary people get poorer and poorer. As a result, the people in turn, stand up and fight against the government, dissolve the government, and in the end, the next faction takes the power. While it is not possible to determine and judge the capacity of a governance within a short period of time, the social and economic situation gets even worse while we try to judge and evaluate the capacity of that faction. Consequently, the people again remove them from power and a subsequent, equally corrupt and inefficient faction comes into power. That is how the devil’s circle begins.
In this process, those with rich wealth and capital place their wealth and capital abroad and eventually migrate (escape) out of their homeland. Those who are highly-qualified leave the country and only those who have no other choice are left to stay in the country and spend the next century fighting each other. This has already happened before many times in history. Some press even call it “The Damnation of Natural Resources”.
We, the Mongolians, should strengthen the management and governing capacity of the government in all levels and ensure institutional capacity of public organizations in order to avoid this vicious circle.
This important task must be carried out by the ruling political parties by means of punishing their members who are responsible for the above crisis, and thereby fulfilling their public, and civic duties of social leadership.
It is almost impossible not to highlight three important statements made last week that suggest that we are living in a truly democratic country with a market economy.
“The three heights of the state,” that Mongolians incorrectly refer to; i.e., the state power: include the Speaker of the Ikh Khural (Parliament), the Prime Minister, (who is the head of the government), and the President. In a real democracy, these “heights” are part of a state power that makes laws, executes the power to implement those laws, and adjudicates the power that makes sure that the other two do what they are supposed to do. It is not a big surprise for us that our judiciary “height” is not at its own proper level because our legislative power replaces the executive power. Our “parliamentarians” are also the Ministers of executive Government. But heights and levels aside, let us focus on the three statements.
First, Prime Minister S.Batbold introduced his plan of action for further development of the economy by leveraging the future large mining resources of the country, and handed-over related legal drafts to the Ikh Khural to consider, bearing in mind the expected boom in the local economy during the next decade. The government is going to create three public companies: “Mongol Ded Butets” (in the infrastructure sector); “Mongol Erchim” (in the energy sector) and “Mongol Erdes” (in the mining sector), in order to operate state-owned enterprises in those industries. This time, however, these state companies will be publicly listed on international and domestic stock exchanges in order to raise capital needed for development of relevant big projects. He also suggested that the state should invite foreign professional companies to manage the Mongolian Stock Exchange operation. Already existing large state-owned enterprises will be sold thru international capital markets at fair-market values, and thus will not repeat the previous mistakes of selling everything to one individual.
Mongolia must use a new method for this new stage of economic development. The famous A. Einstein once said something like, “A problem can be solved by using only one degree higher in approach, compared to the method used at the time of its creation.” We can successfully manage the rapidly growing economic development with the methods that make international capital market operations possible. As of now, if we keep going on with our old ways of economic management, there will still be only a very select group of people who will benefit from all the mining wealth (exactly mimicking the ills that afflicted other developing countries with bountiful resources and greedy leaders in the past, like Iraq, and long ago, Bolivia). The remaining majority will be a victim of “caring and distributing” political propaganda. Then 20 years from now, all Mongolians will be artisan miners (we call them Ninjas) digging in the remaining empty holes of the previous mines dug all around the country.
For the open “public companies”, certain parts of shares are initially sold on the international stock markets (IPO’s), and the initial start-up funding is raised to start up new businesses. Then the rest of the shares are only first offered after the company is already doing well (flushed with plenty of operating capital) and is subsequently more valuable. Then that way, the state earns more profit. The basic conditions of the capital market’s existence and its normal functioning, is the belief of the shareholders in the degree of truth regarding the public financial information published about the company. Consequently, if the people do not trust the information, they will then sell (dump) their shares, prices of the shares will subsequently plummet, and the company’s overall value will decrease. If there is no trust in listed companies, neither foreign bosses, nor domestic management can help much.
The three new proposed companies we discussed above, once they’re listed on international stock markets, will have to provide the public with complete and transparent financial reports on their operation. If the classical method of political parties placing their own members in the top executive positions of state-owned enterprises prevails, and they nominate their own people (friends) to the board, hence taking away the real assets from those companies, either directly or indirectly, the market will immediately react to such attempts, and it will be reflected in share prices. This capital market approach is exactly the one and only way of management needed for Mongolian society today. Then there is more of a chance of getting all the financial documents with true information, if board members of public companies are independently appointed and truly represent the shareholders.
The current crisis of (a lack of) infrastructure in Mongolia is mainly due to the secretive operations of related companies, and that no reliable information has been made available to the public. This is because top executives, who are also political nominees, never are required to take responsibility for their own actions. This mismanagement is further propagated by a chain reaction of not paying debts between state-owned companies: coal is received but not paid for by power stations; electricity and heat is produced and supplied but not paid for by state owned large enterprises and the companies are directly tied to the political powers for many years.
If there was someone inside the infrastructure companies monitoring their operations, administration costs, revenue accounts and managing the interest at which balances are kept, or those who receive the interests, the picture would change dramatically. This is exactly what S.Ganbaatar of “Trade Union” demands the government to report on before acquiescing to another increase in utility prices.
One of the many reasons why the Mongolian Stock Exchange is not operating properly is that citizens do not trust the financial information of their listed companies. This is linked to the Securities Coordinating Committee, who is unable to confirm any of the information. And as well as the confirmation of truth, public listed companies’ operations and products should meet technical and quality standards as well as not harming either consumers, or the environment. These standards should be verified by independent professional inspection agencies. This is another job that we do not perform well in Mongolia.
The second important statement in the last week was regarding the views of the Mongolian society regarding the state. The Speaker of the Parliament, D.Demberel, correctly said on the Day of the Constitution: “Unethical behavior of public executives fueled by a conflict of interests, corruption, moral descent and government bureaucracy, are making the public angry.” This accurate statement from the highest head of the state gives us hope that the situation will change.
The third important statement was made by President Ts. Elbegdorj who suggested imposing a moratorium on the death penalty. A country that follows the civilized world in terms of protecting human rights, will certainly follow (in theory) the same standard in terms of protecting foreign properties. It was a positive message to foreign ministers and possible future shareholders of Mongolian state-owned publicly listed companies.
The idea of shareholders and their true transparent representation via the board in the state-owned public companies for better control is truly a new way of economic thinking in Mongolia.
Only under such controls will there be no chance to plunder common properties in the interests of those who take over other people’s properties. Once that happens, political parties will be freed from exploiters of political positions and material gain.
Then the formation of political parties will reflect a certain real progress, and Mongolia will become a country whose citizens will not run away, but rather, settle in.
A democratic society is governed by rule of law, not politics. In a society that lacks this rule, people do not trust each other, and so comes into play, the rule of the jungle. In the “jungle,” everyone can do whatever they want, provided that their power is stronger than the rest; one rule of jungle can replace the other as long as those in power continue to impose their will on the less powerful.
The objective of a democratic government is to enforce the rule of law. Its state is the creator of laws on behalf of the people and enforces and guarantees enforcement of these laws. That is why legislators are the fundamental source of rule of law; and from top to bottom, legislators of all levels must perform their duties, each at their own stage.
By ways through which the state of any given country protects private and common properties, one can deduce the rules of law and rules of the jungle the country stands and toward which direction it is shifting. In applying this approach to Mongolia, one can see where this nation stands today and where it is going in the future.
Since the 1990 democratic revolution, when all properties were common, we observed an attempt at the creation of private property. As a result of our efforts toward establishing market economic relations, the basic conditions of existence of private property, Mongolians began to own properties. Thousands of Mongolians became wealthy as a result of hard work, entrepreneurship and innovation. As a consequence our nation is getting wealthier.
There remain properties for the protection and enhancement of values of which the state is responsible. These are properties in society that remain public by nature, as we cannot distribute them to everyone, equally. They include parks, gardens, roads, buildings, monuments, the air we breathe, the water we drink etc. Yet, many public officers instead of looking after these properties, rob and plunder them directly and indirectly. A small group of individuals seize state power in the name of political parties, acquire common properties and install their rule. Such actions reinforce the rule of jungle instead of rule of law. The leaders of both ruling political parties, equally encourage plundering of state properties in unison. They reach mutual agreement on who takes what and behave like a few famished wolves in a yard full of sheep.
Although once the citizens see this and demand for them to stop while the state pretends to listen and change the situation, it all closely resembles a conversation between a deaf-mute and a blind man, or a new fashion of social games called “on the two sides of a thick, glass wall.”
All media instruments: newspapers, radio and TV channels have come to the hands of those in power in the jungle. The media becomes active only when there is war between the property “owners” and turns into a brain washing machine in the name of the Mongolian people. Public officials themselves became tools not for protecting common properties and public interests, but for taking them into their own possession.
(However, this “media instrument” still manages to voice itself without much restriction, hence the article you’re reading) In any case, this process goes on intensively in the state from top to bottom, strengthening its unstable bases. At the parliamentary level, common properties were re-named as state properties and privatized, the cream going directly or indirectly to the government official’s own kitchen.
Those who got the most gradually increased their power in all areas of social and economic life. The next wave of new rule was in Ulaanbaatar city, where land was soon evaluated. It was time for the city’s executive office and city representatives’ khural to take their share of “common” properties. It is almost impossible to identify any member of Khural or public executive who has not taken ownership of a public land. These are mostly a school’s sport yard, a kindergarten’s play-ground or a former state-owned manufacturing enterprise taken in the name of someone else. Obtained for just the value if peanuts and sold at fair market values, the lands now belong to today’s “billionaires from the state,” a name coined by the public.
The organized plundering of common properties has become so aggressive that the process has spilled over the walls of our gray house and the city mayor’s palace, reaching city, district and aimag levels.
As of today, the demand for resignation of Khentii aimag governor has been slowed, but the one in Bayan Ulgii aimag is at the level of sitting protest. The district khural’s representatives demand the resignation of district governors (two at the moment: Khan Uul and Songino Khaikhan districts of Ulaanbaatar city at the same time) are making a large noise in media today. Without that, the citizens of that district would not have known about this common land plundering. But the other district governor (Bayaongol district) being “smarter” and in giving a land slot for a summer house to each representative of district Khural miscalculated a human error. Everything was smooth until one odd member said to the media that he refuses the land just like another parliament member D. Enkhbat did refused his 1 billion tugrugs entitled to each of the 76 members to spend for their constituencies.
Unfortunately, the protests or refusals from shares of their own pie will not change anything substantial in this mismanagement. None of the district representatives will return the land. At best they will sell the land at a fair market value and finance all their campaign expenses making even more profit for themselves. Those in the political parties or parliament who grew divine “wings” in their group, will soon be bought out with executive positions in the government. There never was a single removal from a government position after all these years of media reflections on pubic mismanagement and mishandling of common properties. The same officials, who are caught under the spotlight of blame, continue to climb up the power ladder as they did before because replacement of one will break the long chain revealing even more plunderers and thieves. That is why no one in the country is being punished for plundering common property yet.
Acceptance of “nothing can be done once the damage is done” is the acceptance of rule of the jungle. There is only one law in a jungle: divvy up and possess. This looks like the only principle of public governance in Mongolia today.
On the eve of the New Year, the head of the Tax Authority, Mr. Ts. Oyunbaatar, announced with pride, that in the year of ”deepening economic and financial crisis”, or 2009, the state collected “700 billion tugrogs into the state budget and the Mongolia Development Fund, which is 60 billion turgrogs more than what was planned.
” He saluted all the taxpayers of the country with “a spark of warm greeting.” “It is a result of sincere, patriotic efforts from all of you, taxpayers, for Mongolia,” as he continued with the brain wash. The government is an outstanding master of tax and fee collection from citizens. Our economy greeted the new year without any growth, almost 60% of its over 48,000 companies performed with a loss (by Oct.1). Yet the state tax revenue managed to collect a sum that surpassed their plan. This is super. Paying taxes became a much easier process thanks to the introduction of the online payment system in the last year. As a result, 65% of the taxpayers were able to pay taxes via the internet. This is an excellent performance index.
When it comes to taking, our government fills us with pride. So now how about giving some of it back?
Reporting on the specific expenditures from the collected money and the results of its actual spending, evoke quite the opposite response. At best, we can read a few sentences on the amount of money spent for projects here and there. No mention about the actual outcomes, or the factual information has ever been published. If there were a head of a department responsible for spending tax revenues, who could announce the results with a better “sparkling warm greeting,” than we, the taxpayers, who could really see the fruits of our “sincere, patriotic efforts.” The government forcefully collects taxes from taxpayers, ignores other more viable and less intrusive forms of taxation, and clumsily grows in size. Our state constructs palaces for political parties, travels extensively abroad and does not let a month go by without extravagant celebrations. With this in mind, one question always rises: what would happen with our state if we stopped paying taxes?
There will be less interest to work for the state and government if the society, the taxpayers first and foremost, started to monitor the careless spending of tax revenues. When the number of public employees decreases, productivity per employee will increase, so will his salary. If the team of a ministry collectively controlled all the expenses of its public service, there would be more innovation, which would increase efficiency; communication and technology, which would in turn, improve and make all government services available online. Public services will be carried out by technocrats, instead of politocrats.
If the state and government operations were as transparent as a fish tank, thousands of people would shift from distribution of values, to their creation. They would create more and live better. The source of their wealth could not be corruption or plundering, but their labor and aptitude instead.
Thousands of university graduates would aim not for public offices, but for the private sector instead. They would not rely on “back door” arrangements, but only on themselves. Ulaanbaatar city would finally get rid of the terrible smog and would instead have many trees lining wonderful roads. Everyone would live in apartment buildings and the Mongolian economy would become competitive, encouraging Mongolians not to leave the country, but to come back. When all this happens, the government could really be proud. Today’s “pride” is an entirely different matter.
The two current ruling political parties (MPRP and MDP) are merging into one since the creation of a coalition government, as there is now no longer a substantial difference in their policies. The political opposition has disappeared in Mongolia and the Mongolian Revolutionary Party has successfully absorbed the Mongolian Democratic Party.
The Mongolian government is not doing what it is supposed to do, but rather doing very well, the things that it is not supposed to be doing at all. In a democratic nation, the main duty of the government is to protect its citizens’ lives, liberties and properties. However, the properties should not be acquired by force, fraud or theft. The government should not in any way, condone this.
But our state is not only not forbidding this from happening, it is actually encouraging all types of plundering of properties. This has become so clear to the people that some have come to accept and even support these sorts of state act ions. Many executives of state owned enterprises and other entities that are either directly or indirectly connected with public properties, and their political allies, are making larger and larger incomes. More and more billionaires are “born from the state” and their names and the photos of their large real estate holdings and houses are openly flaunted in the media.
The people who have been “public servants” all their lives have become owners of the biggest homes in the best locations, and drive expensive cars and race the fastest horses joining a small group of the richest families in the country.
The two largest parties were supported and financed by their own business circles and in return, the companies were winning government tenders and nominations to important political positions. This procedure took a further step: The businesses have “cut costs” and became political entities themselves, making decisions on behalf of the government on what they want and when they want it.
The main principle of the coalition government is that an action is only permitted so long as it benefits both parties and their allies equally, and mutually.
Under the guise of equal distribution of political power or state budget, each Parliament member received a one billion tugrik spending allowance to use for his or her own “constituency”, which is generally being used in preparation for their re-election, at the cost of taxpayers, and of the poor.
There was almost no principal difference in these two political parties’ political programs in the last election campaign. Both parties have promised to give to the people their own money in cash, thus both parties literally bought their votes. The only difference was in the amount of cash: one promised one million togrogs, the other ¬- one and half million tugrogs. Recently, they reached a compromise for fulfilling their political “promises” and created a fund called “The human development fund” and agreed to give 10 times less cash than promised, in 4 payments. The small group of individuals, who promised to voters at democratic elections to take over the political power and rule the country, is now getting very busy in possessing the natural resources of the country and sharing its future income among themselves. Very soon, they will get even richer with the upcoming growing flow of foreign direct investment into the mining sector.
At the moment, both political parties are also very busy in planning and constructing two grand and pompous towers next to each other in the center of the city. It would be better if both parties move into the one which will be completed first, since they may as well merge because either palace will easily accommodate them both. Or else one should create another construction that eventually connects both towers. In Mongolia, most of the people are getting poorer, but the state is getting richer, a lot richer, and political parties are constructing grand palaces. Half of the capital city’s population is living under minimal living conditions, struggling with the disaster of smog, and looking for masks to cope with the problem, but the Parliament is busy constructing its own palace in the only public garden north of the “Gray” house, while the Khural has already erected its own, and moved in.
The top is busy with building palaces for itself. None of them ever speaks about how many low income family houses, schools or kindergartens could be built or how many of our broken roads could be repaired with these funds.
At the same time, the cheating of the poor with all kinds of hollow prizes and medals has not changed under any president. Mongolia may be the leading nation in the world in the number of generals and state prized individuals per capita; the other field being production and consumption of alcohol per capita. All prizes and awards and their celebrations combined with all kinds of holidays make the alcohol industry the number one leader in the Mongolian economy.
How about creating a special prize for a “Super government” for its great contribution to achieving such leading positions in the world with very thoughtful and exact “plans”?
For the new political party, the only thing remaining is to register its new name, “Mongolian Democratic Revolutionary Party,” with the Ministry of Justice. It is but a small technical job.
For us, the citizens of Mongolia however, the only option left is to look for a real political opposition power and find new political leaders before the election. We still have a couple of years to go.
The structure of a democratic consists of three governing powers: legislative, executive and judiciary. A real democracy is established when each of these three powers executes its own duty properly on its own accord. They create basic conditions that protect individuals’ lives, liberties and property so that citizens can peacefully reap what they sew.
In places where the three powers get comingled, the state faces a crisis and that often becomes the reason for demonstrations and chaos. A small group of the population plunders the nation’s wealth while the majority becomes poor. Then a time comes to completely change this condition by the root.
In Mongolia, a small group of people, in the name of political party agendas, compete for power in order to pursue their personal (and business) interests. They mix the three systems up so much so that in the end it is difficult distinguish one from another. There is no use in even discussing our judiciary system, as the President himself who promised to clean it, got lost in the problems. The other legislative and executive powers have merged together so strongly that one of them has almost disappeared.
The take-over of the executive power by the legislative branch, which starts to occur when members of the parliament become cabinet ministers, has recently reached a whole new level. Each will be entitled to spend one billion tugriks from the budget in own constituency. Thus, everyone in the Mongolian parliament is frantically seeking for labels of fame and wealth to stick on their chests all at the cost of taxpayers’ expense. This “pandemic” is going to infect the city hural and is also spreading further into aimag representatives. The direct or indirect transfer of budget spending rights into the hands of parliament members proves the nonexistence of the executive system and the duality of all seventy six members of the parliament as cabinet ministers by form and substance. This is not a new phenomenon for Mongolians: majority of the cabinet already serves in the parliament anyway.
In Mongolia’s near future, the state revenue will increase with the rise of the world-market price in our abundant mineral commodities. At that time, the political fight for distribution of revenues will heat up and the crisis in political power will deepen. As a result, every leader and his allies in each of the three powers will take over the entire wealth of the country as well as the political power. The rest of the population including their children will work for these leaders and their off-spring forever. At that time there will be no principle difference between who is the Prime Minster, or President or which political party is in power, since all will be selected by a group of a few individuals and their families under a staged election. Such has already been the case in other such defacto democracies.
The voting power of the poor is easily bought. If large demonstrations are needed, they will put red or yellow t-shirts on the people, flags in their hands and some small money in their pockets for a few days’ food to close main roads and squares or block the airport.
There is a “democracy” where the poor get poorer and the rich get richer. Wealthy people’s power slowly starts to dominate since quality education becomes too expensive for the poor. The difference in the living standard of the two groups will be like sky and earth forming a new layer of extremes in both poverty and wealth.
A “Puppet democracy” becomes established in countries where the three powers of the government are not independent and where people cannot fully understand, monitor or protect the value of democracy, i.e. where civic societies have not matured. One of the best examples of this kind of democracy is the Philippines. It is the first republic in Asia to establish a democratic constitution in 1902 and where the poor people are still as much as a majority today, as they were then. The political and economic powers of this country, which has gone ahead of us on the same road, are in the hands of a dozen families. The only difference with us is that the weather is not as cold these so there is not suffer from smoke, as we do here in Ulaanbaatar.
So far, it looks like Mongolia’s current political crisis, combined with Ulaanbaatar’s smoky and disastrous conditions, does not show any signs of clearing up in the future.
THE Mongolian Parliament agreed to approve the Oyu tolgoi agreement after the Naadam festival, 2 weekends ago. If that deadline wasn’t met, a different partner would replace Ivanhoe, as the minister responsible for those negotiations warned. It looks like Rio Tinto – Ivanhoe’s partner that owns a 10 percent equity stake – may back out from the option of 30% shares of Ivanhoe Mines, which was agreed a few years ago. In any case a “dog barking” is getting close” as we, Mongolians say.
The nation is coming to a crossroads after a long ride with irresponsible mining in the past, and its time to choose how much the government should share with the company that found and estimated the huge reserve of gold and copper in the southern mine of Oyu Tolgoi.
The question is, is it worth sharing? It is the duty of society to contribute their opinion when choices are being made in a democratic country, but the final decision is in the government’s hands.
Profit sharing
The Oyu Tolgoi agreement has been focusing mainly on profit sharing for the last few years. Our political leaders have been dividing the ”skin of a bear, which is not dead”. Meanwhile, the general public has been confused on whether the government will own shares of the company, or own shares of the reserve.
The more estimated amount of gold and copper in the Oyu Tolgoi deposit increased the, hungrier Mongolians were to own a larger share of the mine. There has been an attempt at majority share, and now it has been settled to be a large chuck of the total profits. If the government didn’t receive this larger share, political powers threatened not to give permission for further operations of the mine. Furthermore, they made a law saying not only Oyu Tolgoi’s, but also all “strategic deposits” must be owned at a minimum 34 percent by Mongolia.
The reply from the investor was simple: The government has to buy shares of the company and take responsibility as equity owner. The government’s share of the investment will be about US$ 1.7 billion. If the government cant invest now, they are given the option to borrow from Ivanhoe and pay later, with an interest rate of 10 percent per year.
This means that if the government does not pay anything in 10 years time (which is likely since it’s running a deficit), the country will be subject to interest payment equal to the principle sum, which in 20 years is two times the amount –in 30 years, three times. In such case, the total required investment for the project (US5.1 billion) will be paid in time and in total by the Mongolian side. If this is the case, it would be domestic investment, rather than the expected foreign investment. Even after the money is invested by the country, Mongolians still only receive 34 percent of the profit.
There is also a technical problem of owning 34 percent of Ivanhoe Mines because it is part of a bigger picture. Ivanhoe is listed on the New York Stock Exchange and the Toronto Stock Exchange, owns a number of mineral mines and deposits in several countries. It has a coal mine in Australia, a coal deposit in South Mongolia (South Gobi Energy resources) and a gold mine in Kazakhstan (Bakhychkir), along with the Oyu Tolgoi project Mongolia. It is technically hard to separate one already listed company.
The only responsible solution to financing the project is fund, which should be raised at the capital market by Ivanhoe Mines, with the company’s Mongolian shares being owned by another entity like the Government of Mongolia. This would the investment into debt, which can be paid back to a mother company.
Production sharing
The first country to use a production sharing agreement as payment for extracting mineral wealth was Bolivia in the early fifties. Since then, this type of agreement has proven to be the best way of meeting the interests of a foreign investor, as well as a host country.
Mongolia used the same production sharing concept in petroleum law and regulations that were adopted in the early nineties. The contributor of this article had first-hand experience working with a team from Mongolian Petroleum Company, which had translated and studied some 60 countries’ petroleum laws and regulations in order to draft the law.
A mineral production sharing agreement is used successfully in a number of countries nowadays, including the Congo, Ghana, Kenya and Libya. The best example is n the Philippines, which uses the agreement as model form with foreign and domestic investors.
The concept of production sharing is first to stabilize the terms and conditions of the agreement and the taxation environment. Secondly the investor is to take full risk of exploration under the laws and regulations of the host country. Third, if they find a substantial reserve of minerals, the investor will have the first right to develop and produce. Upon production, the company will deduct its costs and expenses, and the balance is shared with the host country.
Both sides would agree to whether the whole production goes to full recovery, or a part thereof. In the case of Mongolian petroleum production law, they proceed to 40 percent of total production of a site. The balance is shared by a ratio that is agreed on between the company and the government. The government may receive its share in the form of product, or in internationally convertible currency from the sale proceeds of that mineral. From the day that cost recovery is attained the sharing ratio is reversed in the favor of the government. In general the sharing percentage is in favor of investors up to the recovery, and reversed thereafter.
The sharing ratio is also dependent on whether royalty payments are made to the host country before or after cost recovery. According to Mongolian mining laws, that royalty payment is five percent from the first day of production.
The government could start with that five percent when the OT mine achieves cost recovery, with the balance shared 40:60. After recovery, te ratio could be changed to 70:30 in favor of the government. In any case, the important factor is to run the daily journal of total production very accurately n the manner mutually agreed, as well as to hold periodical, independent audits.
The sharing ratio can be changed in the process of negotiations which is a principle of the typical of production sharing contract. Another important term that should be agreed is how many times the agreement can be extended and for which period in each extension. In this way both parties would concretely know the exit strategies beforehand.
What is next?
We must complete the agreement as soon as possible. The coming two weeks will be a good time for taking the initiative in the final negotiations. The proffered choice should be production sharing, non profit sharing, as it suits our current conditions. The Mongolian negotiation team is running simulation models with the all terms on the table at the moment, much of which is unknown to the public. This team needs to act fast the current delay is not because of Mongolian side. Our name on the international capital market shall not be hurt once again.
The most important event in the economic life of the country prior to Naadam (the national festival, July 11-13) was the permission given to the government to go ahead with the agreement with Ivanhoe Mines by two major parties that have seats in the Parliament.
This news was a good one at least for owners of shares of Ivanhoe Mines at the New York Stock Exchange and made them happy as it was increasing their share values for one third over night.
But the issue is if the news made Mongolians happy to that extend or not? According to the framework of the agreement draft up to the date, Mongolia will own 34% of the shares without down payment at the beginning, but it will be a loan from the investor (Ivanhoe Mines) for a long term with almost 10% per year and will be paid back in many years from dividend.
What is the economic meaning of owning shares of a company? Do we have any other choice? How can we complete this long waited agreement as soon as possible? These are the questions we face for already four Naadam festivals in row.
Frankly, the news of getting 34% of the Ivanhoe Mines Mongolia shares was not the best news for informed Mongolians. Many of citizens, and a number of civic society organizations say that we Mongolians as the principle owners of the mineral wealth of the country must own majority shares of a company, as only holding share enables us to control the revenue and expenses, then profit sharing in proper way.
We Mongolians underestimate the fact that owning certain shares in a company means we do share to the same portion the economic costs and risk of the company and will be responsible for investment and management failure and success. In such case, it looks like we invest 34% of the required investment at the first glance, but with the suggested terms of loans, we actually are paying 100% for all required investment.
This means Mongolians will get much less in total from the revenue from the Oyu Tolgoi gold and copper deposit, which is already, regarded the largest in the world by its reserve size. This also means a slow shifting of the risk of the foreign investors onto the shoulders of Mongolian taxpayers down the road. This means that nobody will be responsible if there is environmental damage. It will increases operation costs of the company in vain, and will only help the ruling political parties looking good by delivering the election campaign promises of handing cash to everyone. This is a classic approach of many poor countries governments that used to get political and personal advantages from such a large mining project. Take almost any poor African or Latin American country for illustration.
According to agreement draft, Mongolia is to cover the cost and expenses of the Oyu Tolgoi project occurred up to the date, which is hard to estimate to agreeable amount, or to be estimated by the third party since Mongolia is to become 34% owner of that company. Mongolia is to invest into the project 34% of required investment in the future.
Mongolian entrance into the company as a shareholder enables the mother company (Ivanhoe Mines Ltd Canada, listed in Toronto and NY Stock exchanges) to convert its investment to its daughter company (Ivanhoe Mines Mongolia, the license holder of the mine), into a loan with certain percent. Source say the mother company had already claimed that it had invested almost a billion dollars into the project by the date. It means 34% of that loan is expected to be paid by Mongolia sooner or later6
According to foreign investor of the project, estimated 5Bln USD will be required for completion of the project. One third of the investment is to be paid by Mongolians, and the rest later on will be paid by us also as interest payment. With 10 percent per year, one pays interest, equal to principal in 10 years. In 30 years 3 times. The government will not pay back the loan as soon as possible because it knows that it can be delayed, or paid at the end. Our government had been running the budget almost always with a huge deficit. The most irony in here is that all these terms and conditions are initiated and pushed aggressively by the Mongolian Government.
Another provision suggests that the Mongolian side may increase its share at the completion of the contract in 30 years for another 17% in order to get the most wanted majority. May be again under the same condition, and the one side no-risk game will go for the second around. In fact, under these terms all investment, costs and expenses are slowly shifted not to the Government but onto the back of Mongolian tax payers at the end. Taxpayers like you and me, will take the risk.
Actually we were seeking for foreign investment for the project, but it is going to be a domestic investment at the end. Wanted the best, got the usual.
Governments in general, the Mongolian government in particular, was never a good manager because to every company with government participation, the political nominees enter into the company and usually take care of their own interests first instead of the company’s one and increase dramatically operation costs and making company into the red in very short time. If you do not agree, please point out one single government company in this country that is thriving, competitive, effective and profitable. Who that is thriving, is only top management which never bears any responsibility for own bad action.
If there is any single mining company in the country that had recovered the land after production of minerals to the original conditions or as in some countries even better than the photo taken before the land was touched. No single one yet. Recovery of the land is the job that the government is supposed to enforce.
But our government is never does the job it should do, only does the job it must not. As result we got lost over 400 rivers and lakes since the mining boom started 15 years ago. The people and herds had to run away from their land and migrated to the capital city, where over a half of the country population piled up already. By the way we are the 17th largest land in the world.
When the government is inside of the company that will develop the largest copper and gold mine in the world, do we trust that government can enforce the environmental requirement. No. The government officers cannot enforce the rules when they are not inside of a company. How they enforce themselves, when they are inside of the management of a company. It never happened, at least.
For recent years, we are witnessing the strong trend of increases of the government participation in all businesses and strong wish toward making everything in this country public. The reason for that is an increasing opportunity to deliver political election campaign promises to distribute cash. Once the politicians have a large power then they tend to spend all resources without proper accountability. Unrealistic promises of cashes by the political parties at election are forbidden by law in many countries.
Our politicians, both large two political parties who created the coalition government at the moment, seek for down payment upon signing the agreement in order to make their election campaign promises possible. Earlier the government asked 225Mln USD, which negotiated to 120 Mln this time. If this down payment is not paid during 30 years it will be 3 times more with interests and will be billed to taxpayers again.
One possible version of the agreement is stability agreement which is exists in the country already for making sure that future legal conditions change will not apply for the company. Any tax discount, provision of special conditions to that company are hard to implement and even harder to control and will not make discrimination against the native companies.
While we have not yet have a competitive economy, instead of investing all available scarce resources into one project, when even it was not asked, or exempting the investors from many taxes, we would be better off if we just collect related taxes as any other company, and get paid 5% of royalty for consuming the mineral resources of the country from the day one of production.
Concerning the preferences of purchasing Mongolian services and products if available, or hiring Mongolians as first priority, construction of required infrastructure under the Mongolian government planning, making those infrastructure open to other consumers, and not creating a monopoly right etc, all these issues can be included in that stability agreement.
There was second news on Bloomberg that could accommodate all the above mentioned concerns if implemented. In his first interview with the western major press, the newly sworn President Ts. Elbegdorj said that Mongolia would pursue a policy of not taking an equity interest in the Oyu tolgoi project.
This news was a good one for not only Ivanhoe mines shareholders, among which thousands of ordinary Americans who invested in pension funds, but also many Mongolians. Because ordinary Americans and Mongolians both wish own governments spend their tax money very wisely.
We do not expect our government to be a good businessman that will bring a lot of profit to us, but our only wish is put not us into a big debt.
Mongolians for fair taxes, wise spending (FTWS), a non-governmental organization
